The industry is rapidly moving from wireline based to wireless. However, wireline continues to provide the infrastructure for the entirety. Wireline revenue, which supports wireline investment, which is the infrastructure for wireless, is falling substantially. The new Advanced Architecture services (FiOS and Uverse) are great successes, in terms of total impact, but they are not enough to stop the erosion of wireline revenues. What’s more, it appears that these services are growing at a much slower rate, and in fact are in decline.

In the late 1990s and early 2000s telecoms all over the world were building network capacity to meet a traffic growth that didn’t materialize (at least not until a decade later.) Normally responsible executives were proclaiming that the network was growing at 400% a year (!) and capacity was being built to that projection. Nothing grows at 400% for long, and the network certainly didn’t.

The telecoms borrowed money to build for income that never came; they used fraudulent accounting schemes to hide the true costs of their mis-endeavors; equipment vendors loaned telecoms more than the value of their purchases in order to get business. These abuses led to many bankruptcies and great losses on the stock market. World-leading vendors and telecoms went down – either in bankruptcy or by being sold to other companies at pennies on the dollar. In addition, a large over-capacity position was created in the network market place. The telecom bust was said to be ten times more painful than the dot.com bust that occurred more for less simultaneously.

Perhaps George Gilder, the renowned futurist and technologist, was partially responsible for this Telecom Bust. He predicted in 2001 that there would be a trillion dollar telecom market. He was partially right, because there were extensive drivers of added traffic on the network. However, there was one problem, the telecoms couldn’t devise a way to charge for the traffic being generated on the network, and that same problem persists today.

Now, over a decade later, that excess capacity has been abandoned, obsoleted, or more than used up. Telecoms have long since begun building new capacity – much more cautiously this time, using new technology – DWDM and ROADMs largely. Traffic now is growing continuously (at 40%, not 400% a year) but capacity is growing much slower due to the caution from the bitter 2000 experience, and due to the worldwide recession. This combination could be leading to a reversal of the 2000 situation, but potentially just as dangerous – a new telecom BUST created by poor service on what are now very critical telecom links resulting from under capacity.

In this day of everything going wireless, it is important to separate access from network. Wireless is an access service, as is FiOS, Uverse, POTS, etc. They all use the wireline network to interconnect. Investment in wireline supports the network carriage of all access traffic, including wireless. Therefore, when we say that the traffic on the network is increasing by 40% a year, we are talking about traffic on the wireline network, regardless of its access point.

Capital investment (a redundant phrase) is the “Supply” side of the demand – supply relationship in network economics. Actually, the supply side is cumulative investment plus ongoing capital investment, but we are only going to deal with the going forward issues. If capital investment is not keeping up with growth as in the introductory chart of this section, then the ongoing traffic growth will overtake the capacity and all of the disastrous things previously delineated will happen to the network – slow responses, server shutdowns, etc. So, the question is, given the traffic increases we have already described on the demand side of the equation, are the major telcos investing enough to keep the network capacity ahead of demand? The short answer would appear to be – “No!”

This report will investigate the parameters of this situation:

supply and demand

wire-line income

optical network innovation

and telecoms’ investment

After reviewing the market situation of traffic demand versus supply capacity, we will provide forecasts for various classes (ROADMs, DWDM, Switches and Routers) of optical network equipment in this environment.